TaxTMI 
TaxTMI 
2019 (9) TMI 784
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....gative CIP Rs. 1,25,53,000/- 2. Prior period expenses Rs. 10,77,994/- 3. Liquidated damages Rs. 3,67,02,426/- 4. Depreciation Rs. 2,82,62,389/- 5. Disallowance u/s.14A Rs. 75,00,500/- 6. Provision for warranty Rs,2,39,35,670/- 7. Legal and professional expenses paid to Mckinsey & Company Rs. 9,02,00,000/- 8. Commission paid on Sales Rs. 13,45,000/- 9. Adhoc disallowances in respect of vehicle expenses, telephone expenses, miscellaneous foreign travel expenses, public relation expenses 3. Aggrieved against the assessment order dated 30.12.2008, the assessee filed appeal before the Commissioner of Income Tax(Appeals). In First Appellate Proceedings, the Commissioner of Income Tax(Appeals) granted part relief to the assessee by deleting some of the additions in full. In the case of some of the disallowances/ additions, the Commissioner of Income Tax (Appeals) gave partial relief. 4. Against the findings of the Commissioner of Income Tax (Appeals), both, assessee and the Revenue are in appeal before the Tribunal. For the sake of convenience, we would first take the appeal of the assessee. ITA No.....
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....d in law, the learned CIT(A) erred in sustaining addition under this head to the extent of Rs. 24.45 lacs being 2.5% of exempt income. The addition sustained by the learned CIT(A) be deleted. 6. Provision for warranty : On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in sustaining disallowance under this head to the extent of Rs. 59,83,918/- being 25% of warranty provision rejecting the contention of the Appellant that the provision made by the Appellant was on a consistent and sensible basis and was allowable as such. The disallowance sustained by the learned CIT(A) be deleted. 7. Legal and Professional Expenses- fees paid to Mckinsey & Company : On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in treating the fees paid to Mckinsey & Company as deferred revenue expenditure and allowing deduction there for only to the extent of 1/5th thereof and the balance over the next four years rejecting the contention of the Appellant that the whole of the expenditure was allowable in the year of incurrence thereof. The disallowance sustained by the learne....
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.... period. The Co-ordinate Bench of the Tribunal in assessee's own case for assessment year 2004-05 has decided this issue in favour of the assessee by allowing full deduction in respect of liquidated damages. 6.4 The ground No.4 of the appeal is relating to assessee's claim on depreciation @80% on plant & machinery used in manufacture of air/gas/fluid heating systems being renewable energy devices. The ld. AR submitted that the assessee is manufacturing renewable energy devices. According to Appendix-I of Income Tax Rules, 1962, plant and machinery used in the manufacture of renewable energy device is eligible for deduction @80%. This issue was raised for the first time in assessment year 1998-99. The same was decided in favour of the assessee holding that air/gas/fluid heating systems were renewable energy devices and the plant and machinery need to be exclusively used for the manufacture thereof. Only additions to machinery & plant exclusively used in the manufacture of heat pumps were held not eligible for higher rate of depreciation. Similar disallowance of depreciation was made in assessment year 2004-05. The Tribunal following its earlier decision on the issue granted relie....
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.... (Madras); iii. CIT Vs. Crompton Engineering Co. Ltd. (2001) 117 Taxman 705 (Mad.); iv. Indo Rama Synthetics (I) Ltd. Vs. CIT (2009) 185 Taxman 277 (Delhi). 7. Mrs. Nandita Kanchan representing the Department vehemently defended the assessment order. The ld. DR submitted that the Revenue in cross appeal has raised grounds corresponding to grounds No.1, 2, 5, 7 and 8 of the appeal by assessee. The ld. DR fairly admitted that all the issues raised in the appeal by assessee, except payment of legal and professional fees to Mckinsey & Company, have been considered by the Tribunal in immediately preceding assessment year in assessee's own case. 7.1 In respect of ground No.8, the ld. DR submitted that the assessee has claimed expenditure to the tune of Rs. 9.02 Crores towards payment of fees to Mckinsey & Company. The Assessing Officer after considering the fact that the assessee has got advantage in the form of improvement in profit making apparatus of the company, disallowed assessee's claim of expenditure as revenue and held the same to be on capital account. To come to such conclusion the Assessing Officer relied on Delhi Tribunal - Special Bench decision in t....
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....al boilers and heat transfer equipments and undertakes the projects on contract basis and the contract normally runs over a period of more than one year. The assessee was accounting for income on such projects by following the "Projection Completion method" and was raising invoices as per the scheduled payments agreed with the clients but at the same time had created provision towards "Contribution Equalization Provision" to adjust excess billing. During the year, the provision of contribution equalization debited to the Profit and Loss account was Rs. 4,53,93,679/-. AO noticed that the excess amount realized as per the invoices was not offered as revenue receipts and to that extent profit was not offered as income. AO was of the view that since the invoices was raised as per the agreed schedule; the invoice value should be treated as revenue receipts. He further noticed that identical issue arose in A.Y. 1997-98 wherein it was held that the value reflected in invoices raised as per agreed schedule with the clients was to be treated as revenue receipts. AO therefore held that the provision of Rs. 4,53,93,679/- cannot be allowed. He accordingly disallowed the same and made its addit....
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....ct to increasing the income to the extent of provision for profit equalization. We find that identical issue of increase in the contract income arose in assessee's own case in A.Ys.2000-01 to 2002-03 and the coordinate Bench of the Tribunal decided the issue in assessee's favour by following the Tribunal order for A.Ys. 1997-98 to 2000-01, by holding as under: "18. We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to increasing the income to the extent of provision for profit equalization. We find that identical issue of increase in the contract income arose in assessee's own case in A.Y.2000-01 and 2001-02 and the coordinate Bench of the Tribunal decided the issue in assessee's favour by following the Tribunal order for A.Yrs. 1997-98, 1998-99 and 1999-2000, by holding as under: 9. The third ground raised by the assessee in appeal relates to income recognition from contract in accordance with Accounting Standard 7 of the Institute of Chartered Accountants of India (ICAI). The Revenue in cross appeal for assessment year 2000-01 has also raised this issue as ground No.1. The assessee is manufactu....
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.... facts and circumstances in the present year, nor there is any change in the accounting treatment given by the assessee. We do not find any reason to deviate from the view taken by the Co-ordinate Bench in assessment years 1998-99 and 1999-2000. Accordingly, this ground in the appeal of the assessee is accepted and the ground raised by the Revenue in its appeal is dismissed. 19. Before us, since both the parties have admitted that the facts of the case in the present ground are identical to that of earlier years and since in earlier years, the issue has been decided by Co-ordinate Bench of the Tribunal in assessee's favour, we therefore following the decision of the coordinate Bench of the Tribunal in assessee's own case for earlier years and for similar reasons, allow the ground of assessee and thus, the assessee's ground No.4 is allowed and Revenue's ground No.2 is dismissed. 14. Before us, since both the parties have admitted that the facts of the case in the present grounds are identical to that of earlier years and since in earlier years, the issue has been decided by Co-ordinate Bench of the Tribunal in assessee's favour, we therefore following the reasoning....
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....0,77,994/-. We observe that in the past as well the assessee has been claiming "prior period expenditure". After being unsuccessful before the Commissioner of Income Tax (Appeals), the assessee carried the issue in appeal before the Tribunal. The Tribunal adjudicated this issue in favour of the Revenue. The Tribunal has been taking a consistent view in rejecting assessee's claim of prior period expenses in the past. For the sake of brevity, we are not reproducing the findings of the Tribunal for assessment year 2004-05. Thus, following the order of Tribunal in assessee's own case in ITA No.1765/PUN/2012 (supra.), the assessee's claim of "prior period expenses" is rejected. Thus, ground No.2 raised in appeal by the assessee is dismissed. 8.3 The Ground No.3 in appeal by the assessee relates to liquidated damages. The assessee has been claiming penalty paid to customers for delay in delivery of consignment as "liquidated damages". We find this issue is recurring in the past several assessment years. The Co-ordinate Bench in appeal of assessee for assessment year 2004-05 decided the issue in favour of the assessee by placing reliance on assessee's own case in ITA No.1055 & 1056/PUN....
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....he relevant extract of the findings of Tribunal in assessment year 2004-05 are reproduced herein below: "35. We have heard both the sides and perused Para 26 to 29 of the Tribunal's order wherein the Pune Bench of the Tribunal has decided the issue by observing as under : "26. Ground No.6 is with respect to disallowance of higher depreciation. 26.1. On perusing the depreciation chart, AO noticed that assessee had claimed depreciation at higher rate of 80% depreciation on plant Nos.4 and 8 and 11 wherein it was manufacturing shell type boilers and absorption cooling devices. It was Assessee's contention that these items of plant and machinery were used in the manufacture of renewable energy devises and therefore it was eligible for higher rate of depreciation of 80%. The submissions of the Assessee were not found acceptable to AO. AO was of the view that due to the type of equipments that were manufactured by the assessee with the aforesaid machines, the aforesaid machines per se did not qualify for higher depreciation as those machineries could be used for manufacturing of other types of machinery as well and that it cannot be said that the machineries we....
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....ting the admissible depreciation to a rate of 25% is hereby confirmed. Coming to the remaining plants and machineries under discussion i.e., plants no.4 and 8, the appellant's arguments have been already noted. The Assessing Officer was certainly not justified in holding that entry 3(xii)(e) applies only to solar heating system. There is nothing in this entry enabling such a conclusion. In the absence of any prefix such as 'solar' any renewal energy device being in the nature of an air / gas / fluid heating system will be covered by this entry. However, the crucial questions is if the products manufactured by the appellant are renewal energy devices as distinguished from energy saving devices which are covered by entry no.3(iii). During the course of the appeal proceedings, the appellant was asked to obtain and furnish certificate from experts to the effect that the multitherms, shellmax, fluidpacs and bi-drum boilers are in the nature of renewal energy devices. The appellant was also asked to submit copies of brochures, pamphlets as may be available with regard to the specifications and functioning of these products. The details / evidences thus called for have not been f....
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.... the issue partly in favour of assessee by holding as under : "26. We have heard the rival submissions and perused the material on record. The issue in the present case is with respect to allowing higher rate of depreciation on certain machineries. We find that identical issue of disallowance of high depreciation arose in assessee's own case in A.Yrs. 2000-01 and 2001-02. The coordinate Bench of the Tribunal while deciding the appeal in ITA Nos. 1247 & 1248/PN/2005 decided the issue partly in favour of assessee by holding as under: "11. The fifth ground in appeal of the assessee is with respect to claim of 100% depreciation on plant and machinery. The Revenue has also impugned the findings of the Commissioner of Income Tax (Appeals) on this issue as ground No.2 in its appeal. 11.1 The assessee had claimed 100% depreciation on its plant and machinery in Plant No.3, Plant No.4, Plant No.8, Plant No.10 and Plant No.11. In the first appeal, the Commissioner of Income Tax (Appeals) accepted the contentions of the assessee in respect of all the plants except Plant No.11. The assessee has come in second appeal with respect to the claim of depreciation @ 100% in ....
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....ars. We find no reason to take a contrary view. Accordingly, the ground with respect to claim of depreciation in assessee's appeal and the appeal of Revenue is dismissed." 27. Before us, since both the parties have admitted that the facts of the case in the present ground are identical to that of earlier years, we therefore following the decision of the coordinate Bench of the Tribunal in assessee's own case of earlier years and for similar reasons hold that assessee is eligible to claim depreciation @ 100% with respect to plant and machinery used in the manufacture of air / gas / fluid systems but is not eligible for 100% depreciation in respect of plant and machinery used in the manufacture of heat pumps. Thus the ground of assessee is partly allowed." 29. Before us, since both the parties have admitted that the facts of the case in the present ground are identical to that of earlier years, we therefore following the decision of the Co- ordinate Bench of the Tribunal in assessee's own case for A.Y 2002-03 and for similar reasons hold that assessee is eligible to claim depreciation @ 80% with respect to plant and machinery used Plant Nos.4 and 8 in the manufactur....
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....of Rotork Controls India P. Ltd Vs. CIT(supra.) granted partial relief to the assessee by restricting assessee's claim to 75% of the provision created by the assessee. 12.1 We observe that assessee's claim for 'Provision for Warranty' is being consistently disallowed by the Assessing Officer right from the year 1993-94 to 2001-02. The assessee carried the issue in appeal before the Tribunal. The Tribunal allowed assessee's claim on provision for warranty in full. The observations of the Co-ordinate Bench on this issue in ITA No.1247 & 1248/PN/2005 for assessment years 2000-01 and 2001-02 decided on 30.06.2015 are as under: "7.2. After perusal of the order of Co-ordinate Bench dated 15.12.2014 in assessee's own case for assessment years 1998-99 and 1999-2000 we find that this issue has been decided in favour of the assessee. The findings of the Co-ordinate Bench on the issue are as under :- "12. In this context, relevant facts are that the assessee made a provision of Rs. 3,45,59,744/- on account of provision for warranty with respect to the products sold. Considering the opening balance of provision of Rs. 2,95,97,441/-the differential amount of provision amoun....
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....ssessee has claimed legal charges to be on revenue account whereas, the Department is of the view that consultancy and legal fees paid by the assessee to Mckinsey & Co. is capital in nature, as the assessee has acquired intangible asset that has resulted in enduring advantage to the assessee. The question whether the expenditure is revenue or capital in nature is a mixed question of fact and law. In the present case, we observe assessee had hired service of Mckinsey & Co. to suggest and recommend the business strategies for improving profitability and growth of the company. Indeed, there was substantial improvement in the turnover as well as profit of the company after business strategy formulated by Mckinsey & Co., were implemented. Mere fact that the assessee has earned some enduring benefit from the strategies would not be decisive to determine the character of expenditure. It would be relevant to mention here that the assessee had hired services of Mckinsey & Co. to formulate strategy in the existing line of business of the assessee. The assessee had not diversified in the new line of business. Since consultancy and legal charges were paid for improvement in the existing line o....
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....s, development of detailed business strategies for the assessee to grow in the dynamic business environment. The fees paid to the consultant was disallowed by the revenue officials as capital expenditure on the premise that the benefits derived from such consultancies would enure to the future years also. According to the learned counsel for the assessee, this question of law is covered against the revenue by the decision of this Court in the case of CIT v. Crompton Engineering Co. Ltd. [2000] 242 ITR 317 (Mad.), in which it was held as follows: "Merely obtaining a report from the management consultant and paying the fees therefore, could not be regarded as capital expenditure as such report was not obtained as part of documentation packages, but was obtained in a contract covering comprehensive restructuring of the business involved. No new line of business was started on the strength of the report of the consultants. The report was not regarded as essential part for any new business that the assessee commenced thereafter. In the circumstances of the case, the expenditure incurred by the assessee, in obtaining that report was clearly an expenditure of the revenue in chara....
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..... 74,04,128 holding the same to be capital expenditure. 15. Appeals preferred by the appellant before the CIT(A) as well as the Tribunal were dismissed and this is how the appellant has filed the present appeal under s. 260A of the Act raising the aforesaid question of law. 16. The argument of the appellant before the Tribunal, and before us, was that the purpose of the said operational efficiency and profitability study was to improve and enhance the nature and profits of the appellant company. It was also submitted that the said expenditure was not incurred with a view to acquiring any capital asset or enduring advantage in the capital field. The Tribunal, however, rejected this submission of the appellant on the ground that there was no written agreement between the appellant and M/s McKinsey & Co. based on which the Tribunal could have ascertained the scope of the study and that it was only in a situation where the assignment had actually been completed and put in practice that the Tribunal could have determined whether the said study, in fact, resulted in enhancing the productivity and profitability of the company. Since the assignment was, in fact, never com....
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....ket penetration is 'revenue in nature'. The Commissioner of Income Tax (Appeals) has rightly reversed the findings of Assessing Officer and has held that the expenditure is not capital in nature. We are in agreement with the observation of the First Appellate Authority that no intangible asset has come in existence and hence, expenditure is allowable as revenue. However, we do not subscribe to the observation of the First Appellate Authority that the expenditure is allowable as 'deferred revenue expenditure'. In the light of the judgments discussed above, we hold the expenditure is on revenue account and hence, entirely allowable in the impugned assessment year. Thus, the assessee succeeds on ground No.8 of the appeal. 14. In the result, appeal of the assessee is partly allowed in the terms aforesaid. ITA No.1289/PUN/2013 (By Revenue) A.Y. 2005-06 15. In ground No.1 of the appeal, the Revenue has assailed the findings of the Commissioner of Income Tax (Appeals) on revenue recognition method. This ground of appeal by Revenue is corresponding to ground No.1 of appeal by the assessee. Since we have allowed assessee's claim in full, ground No.1 of the Revenue's appeal is di....
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....s of the assessee comprising of share capital and reserves are to the tune of Rs. 410.09 Crores and the investment made is to the tune of Rs. 316.16 Crores. Own funds of the assessee are sufficient to cover the investments made, hence, no disallowance on account of interest expenditure should be made. In support of his submissions, the ld. AR has drawn our attention to the Balance Sheet of the assessee as on 31.03.2005 at Page 48 of the 24th Annual Report for the Financial Year 2004-05. The ld. AR further pointed that in the past, Tribunal has upheld the findings of Assessing Officer in confirming disallowance @ 2.5 % of the exempt income earned. 18.1 The ground No.4 of appeal by the Revenue is corresponding to ground No.5 of the appeal by assessee. While adjudicating ground No.5 of appeal by assessee, we have upheld disallowance u/s. 14A of the Act @ 2.5% of the exempt income earned. As regards interest expenditure is concerned, the assessee has demonstrated that own funds of the assessee are much more than the investments made. It is a well settle law that where the assessee is having both, own funds and borrowed funds, it shall be presumed that investments have been made by a....